A Massachusetts superior court has recently ruled that an insurance company choosing to appeal a jury’s decision to a higher court rather than extend a formal settlement offer after a verdict has been entered against them is NOT a commission of unfair settlement practices.
The decision, Graf v. Hospitality Mutual Ins. Co., held that the “functional equivalent” of a settlement offer from the insurer was not a failure to “effectuate a prompt, fair and equitable settlement,” which would violate G.L.c. 176D, §3(9)(f). The insurer stopped short of a formal offer due to a dispute over the policy limits in question. The court found this dispute to be in good faith, and Hospitality Mutual’s open offer of the $500,000 settlement, based on the limits they believed existed, was a valid “functional equivalent” during the appeals process.
Plaintiff’s argument relied on Rhodes v. AIG Domestic Claims, Inc., which was decided three years prior. The family of a woman who was hit by a truck, rendering her a paraplegic, was awarded $11.3 million by a jury, and an additional $22 million in damages after AIG made willful and intentional attempts to thwart settlement. AIG unsuccessfully argued that their conduct did not affect the actual jury verdict, and that plaintiffs would not have accepted their offer anyway, so the plaintiff was not damaged and AIG was not liable.
The Right to an Appeal
One key difference between Rhodes and Graf, however, was the blatant, undisputed liability in the case. Rhodes was so straight forward, in fact, that the primary insurer of the truck company, Zurich, tendered their entire policy to AIG as the excess insurer, knowing that they would be paying the plaintiff in full. This tendering of policy limits freed Zurich from liability in the eventual lawsuit against AIG. Policy limits were of no dispute in Rhodes either, whereas a genuine dispute existed in Graf.
Had Graf been ruled in the same manner as Rhodes, it would functionally deny any insurer from filing an appeal – a bad faith claim would automatically exist if an insurer chose to appeal. The Graf decision, however, pulls back the reins on that, allowing 176D to be read as a breach only when there is a clear determination of liability.
Functional Equivalent versus Formal Extension
But what Graf clears up in its right to an appeal for insurers, it muddies in determining what type of settlement offer is sufficient to avoid a 176D claim. A claim is typically not prevalent unless a plaintiff has no opportunity to accept an offer. In Rhodes there was no way for the plaintiff to settle on $3 million, given the extent of injuries and liability of the truck driver. AIG’s offers were so incredibly low that it was impossible for the plaintiff to be remedied by the settlement.
The insurer in Graf, however, had their $500,000 policy limit available to the plaintiff at all times – the dispute was over whether this was the proper policy. The judge in the case saw this as the “functional equivalent” of an offer, and just like in Rhodes, whether or not the plaintiff would turn down the offer anyways is irrelevant. This ruling seemingly broadens the definition of a settlement offer.
What to do as an Insurer
The Graf decision seems to give back some flexibility to insurers that the Rhodes decision took away, in making sure that the right to an appeal is still available to insurers and also by broadening the scope of a settlement offer. Still, money must be available to the plaintiff in order for a settlement to be valid. It is important for an insurer to put some value of money on the table that can be bargained over in order to protect them from falling in to a 176D claim. Honest efforts of settlement can protect an insurer from liability.
Not only should insurers make sure that the plaintiff always has access to a settlement that is more respectable than in Rhodes (at one point, plaintiffs demanded $16.5 million, to which AIG offered $3 million), but it is also essential to make sure that an appeal is not frivolous. The right to an appeal is an important piece of American law, however, if an insurer were to extend a judgment by appealing for some minute detail in an attempt to prolong settlement and avoid paying, they could still be found liable of 176D. Failing to settle after a jury verdict can be allowed in some cases, but an insurer must make sure that they are not unreasonable in doing so.
Law Clerk Shaun Loughlin contributed substantially to this post.